Key Terms – scarcity – labor – economics – entrepreneur – need – production – want – Gross Domestic Product (GDP) – factors of production – land – capital – financial capital The Fundamental Economic Problem • The fundamental economic problem facing all societies is that of scarcity. • Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. The Fundamental Economic Problem (cont.) • Scarcity affects almost every decision we make. • Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources. Needs and Wants • Economists often talk about people’s needs and wants. – A need is a basic requirement for survival and includes food, clothing, and shelter. – A want is a way of expressing a need. “There Is No Such Thing as a Free Lunch” • Virtually everything we do has a cost– even when it seems as if we are getting something “for free.” Most things in life are not free because someone has to pay for the production in the first place. Three Basic Questions Click the mouse button or press the Space Bar to display the information. WHAT to Produce A society cannot have everything its people want, so it must decide WHAT to produce. HOW to Produce Should factory owners use mass production methods that require a lot of equipment and few workers, or should they use less equipment and more workers? FOR WHOM to Produce • After a society decides WHAT and HOW to produce, the things produced must be allocated to someone. The Factors of Production The reason people cannot satisfy all their wants and needs is the scarcity of productive resources. • The factors of production: • Land (raw materials) • Capital • Labor • Entrepreneurs. The Factors of Production (cont.) All four factors of production are required if goods and services are to be produced. Land • In economics, land refers to the “gifts of nature,” or natural resources not created by humans. • Economists tend to think of land as being fixed, or in limited supply. • Because the supply of a productive factor like land is relatively fixed, the problem of scarcity is likely to become worse as population grows in the future. Capital • Another factor of production is capital– the tools, equipment, machinery, and factories used in the production of goods and services. • aka Capital Goods. • Financial capital, the money used to buy the tools and equipment used in production. Labor Labor–people with all their efforts, abilities, and skills. • This category includes all people except for entrepreneurs. • Unlike land, labor is a resource that may vary in size over time. Entrepreneurs Entrepreneur, a risk-taker in search of profits who does something new with existing resources. Some people are special because they are the innovators responsible for much of the change in our economy. • They provide the initiative that combines the resources of land, labor, and capital into new products. Production • When all factors of production are present, production, or the process of creating goods and services, can take place. The Gross Domestic Product (GDP) is the most comprehensive measure of a country’s total output and is a key measure of the nation’s economic health.